For Rachel Reeves, the bad news just keeps on coming.

Days after the National Institute of Economic and Social Research (Niesr) warned that she was facing a £50bn hole in her Budget, the Bank of England has now said that her Government’s policies are fuelling a worrying spike in inflation and dragging on growth.

It means interest rates may take longer to come down than previously thought. This will deliver a fresh blow for a Chancellor responsible for servicing a near-£3tn national debt pile.

Reeves has sought to claim that her problems stem from the fact that “the world has changed”. But the Bank of England’s latest analysis shows that much of the pain has been self-inflicted.

A sharp rise in the National Minimum Wage and increases to employers’ National Insurance contributions are sending food prices surging. Labour’s workers’ rights reforms are putting off investment and harming growth. Changes to inheritance tax are also dragging on the economy. And a new net zero packaging tax is not only deterring investment but driving shop prices higher too.

With public finances deteriorating, significant fresh tax rises in the autumn now look almost certain. The Bank’s analysis suggests Reeves and Labour must share the lion’s share of the blame.

The Chancellor’s tax raid last year has not only undermined the jobs market and economic growth, it has also pushed up prices – particularly in supermarkets.

That has put the fear of God into the Bank of England, which is increasingly concerned as inflation moves further and further above its 2pc target. It stood at 3.6pc in June, up from 3.4pc a year earlier.

Rising inflation threatens the Bank’s ability to keep cutting borrowing costs. Officials, led by Andrew Bailey, the Governor, on Thursday voted to cut interest rates again, from 4.25pc to 4pc. But they did so by the finest possible margin, with four of the nine members of the Monetary Policy Committee (MPC) voting against a rate cut.

The Bank’s explanation for its decision, and in its latest economic outlook, make clear that policymakers are very concerned that inflation could get out of control.

The minutes of the MPC’s meeting warn of growing “upside risks” to inflation, promising that the committee “remains focused on squeezing out any existing or emerging persistent inflationary pressures”.

Forecasts for price rises have been upgraded again. The Bank now predicts inflation will peak at 4pc in September, double the MPC’s target rate. It has also upgraded its forecast for inflation next year and thinks price rises will only fall back to 2pc in 2027.

Much of the rise has come in the form of higher energy bills and food prices. These are both unavoidable, as all households must pay for food and fuel.

Energy prices are largely determined by international markets but food inflation being fuelled by domestic factors – prices are rising faster in Britain than on the Continent. Which is is where Reeves comes in: increases to taxes and wages announced in last year’s Budget are feeding through into prices on shelves.

“A relatively high proportion of staff in [food manufacturing and retail] are paid at or close to the National Living Wage, which increased by 6.7pc in April,” the Bank notes.

“Furthermore, the overall labour costs of supermarkets are likely to have been disproportionately affected by the lower threshold at which employers start paying NICs [National Insurance contributions], in part because a relatively high proportion of supermarket staff is employed part-time.”

Reeves mounted a £25bn raid on employers by increasing the rate of NICs and cutting the annual salary threshold at which the levy kicks in.

A new packaging tax is also pushing up costs on supermarket shelves. Rules that make producers responsible for recycling, rather than councils, would add roughly half a percent to food prices if fully passed on to consumers, the Bank has calculated.

Producers will start receiving their first Extended Producer Responsibility (EPR) bills in October, though the Bank said there was already evidence that suppliers were pushing up prices.

As a result of all of the above, the Bank expects food prices to rise by as much as 5.5pc this year. Shopkeepers fear it could be even worse – the British Retail Consortium expects food prices to rise by 6pc.

Worse may yet be to come. Angela Rayner, the Deputy Prime Minister, wants 18 to 20-year-olds to earn the same full National Living Wage paid to those aged 21 and over. If that was to be implemented today, it would mean a more than 20pc rise in the hourly cost of employing the oldest teenagers – who are often given their first jobs in retail and hospitality.

Future increases to the minimum wage are also based in part on inflation, so higher inflation today can cause it to rise faster in future, risking a costly and economically painful spiral.

It is not just wages. A wide range of benefits are usually upgraded each April by the previous September’s inflation rate. If the Bank’s forecasts are right, we could see a 4pc increase in handouts.

All of this shows why the Bank is nervous about cutting rates too quickly. If they go too fast, inflation could get out of control.

Yet the economy desperately needs lower interest rates. The Bank’s analysis suggests it is in a weak state and could do with a shot in the arm.

Businesses surveyed by the Bank warn that tax rises, the minimum wage and the Workers’ Rights Bill, which will add as much as £5bn of costs for companies, are all forcing them to hold off investment.

Bailey warned on Thursday that growth remains “subdued”. The Bank said in its Monetary Policy Report that risks are titled to the downside.

The most doveish MPC member is Alan Taylor. He initially voted for a supersized 0.5 percentage point cut, which would have taken borrowing costs to 3.75pc. In an unprecedented second vote – to break a deadlock on the committee – he scaled that demand back to support a single cut.

Reeves may have welcomed a 0.5 percentage point cut, but Taylor’s reasoning is not one she will like: he fears “an increased risk of recession” in the years to come.

Taylor does predict inflation will fall back because prices have been driven up by “one-off changes in tax and administered prices” – perhaps some small relief for the Chancellor.

Yet there is a growing risk that the tax rises will not be a one-off at all. Niesr has said “substantial” tax rises will be needed, potentially even eclipsing her record-breaking £40bn haul last year.

More tax raises would restart the whole damaging cycle again and raise the risk of the dreaded “stagflation” – stagnant growth and high inflation.

The higher borrowing costs stay, the greater the pressure on the Chancellor to raise taxes. If this year’s experience is anything to go by, that will not solve her problems. Reeves has become her own worst enemy.

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